COMMUNITY INVESTMENT FUND

CONSULTATION DRAFTJANUARY 2006

CONTEXT AND BACKGROUND

Capital gap in the community investment sector

Experience in the U.S. demonstrates community investments can generate market returns for institutional investors

Initiative to establish community investment fund in Canada for institutional investors

Funded by Western Diversification and managed by the Canadian Community Economic Development Network (CCEDNet)

COMMUNITY INVESTMENT DEFINED

Different definitions of community investment (CI) or community development finance

For the purpose of the Community Investment Fund, CI is defined as: market grade investments that generate collateral social returns such as jobs, affordable housing, community economic restructuring and community services

RATIONALE Community investing is an emerging

asset class: as with private equity 15 years ago, CI creates new investment opportunities

Opportunity to take advantage of unique assets that exist in underserved markets, e.g. under-utilized skills, local community knowledge

US ETI EXPERIENCE

American pension funds involved in community development finance:

CalPERS New York State Pension Funds New York City Pension Funds United Methodist Church General Board of

Pensions and Health Benefits The Church Pension Group (Episcopal

Church of America) AFL-CIO Housing Investment Trust

ANALYSIS OF US ETI EXPERIENCE (4 case studies) ETI policies from 5 – 20 years old Purpose: To finance under-invested

markets, e.g. affordable housing, community facilities, small business, international micro-finance

Primarily low-income housing Allocation cap: .8% - 10% of fund assets;

2% common Comparable returns to asset class Work through intermediaries

CANADIAN ETI EXPERIENCE

Concert Properties Over $800 M in assets Established in 1989 100% of fund in ETI projects:

Commercial, industrial and residential real estate, including affordable rental housing

Mandate to employ unionized trades people on job sites

CANADIAN ETI PRODUCT

CMHC: Canada Mortgage Bonds (CMB) Program (June 2005)

Mortgage loan financing for social housing

Principal guaranteed by government 3.55 - 5.527% coupon since inception 46% of investors are pension and fund

managers (mix of Canadian and international investors)

$54.45 billion in pool

COMMUNITY INVESTMENT FUND PROPOSAL

Seeking feedback on $20 M Community Investment Opportunity

CIF OBJECTIVES

Maintain security of invested capital Provide return equivalent to GOC 5-year

bond rate Low investment risk through

government guarantee of principal (TBD)

Support community economic growth and asset development

FINANCIAL STRUCTURE Returns/Asset Class: Equivalent to GOC 5-year

bond rate Risk: Principal guaranteed by government (TBD) Liquidity: Available on a partial basis (prior to

normal five-year term) through redemption of CI Fund's cash holdings (20% of Fund to be held in Treasury Bills) 

Governance: Oversight provided by intermediary (Vancity) and proposed Investment Committee (2/7 reps are investor appointments); both investor reps must be in agreement

Investor A

Investor B

Investor C

Investor D

Intermediary: Vancity Credit UnionInvestment

Committee

Credit Unions

(3)

Loan Funds

(3)

CAPITAL FLOW

LENDING CRITERIA

Project must be in Western Canada Conventionally sound and viable

investment Strength of the borrower Strength of the project Loan projects must be

community/FN; CED impact Terms of no more than 5 years

INVESTMENT STRATEGY

Company characteristics Small businesses that diversify and

strengthen local economies Community real estate including

affordable housing, community facilities and construction financing, non-profit asset development

Businesses with less than $10 million in annual revenues and less than 100 employees

INVESTMENT STRATEGY CONTINUED

Deal Characteristics Debt financing $2 M maximum Borrowers include individuals, partnerships,

societies, co-operatives or corporations Excluded: tobacco, pornography,

franchises, multi-level marketing schemes, gambling casinos or bingo halls (to be aligned with government restrictions)

Reasonable security and equity components

INTERMEDIARY

Vancity Credit Union: $10.5 billion in assets; largest community-based credit union

in the world Citizens Bank, wholly owned subsidiary, offers commercial

loans; national license with offices in Vancouver, Calgary and Toronto

Proven track record in social economy $18 M in regional development financing through Vancity

Capital Corporation: last 5 years invested $35 M in over 100 investments; 10 syndicated loan transactions over past 2 years

Leading ethical fund managers; major wealth management division including full service brokerage

$300 M Victoria real estate project Range of community development finance vehicles

PARTNERSHIP OPERATING TERMS Investment Committee: Reviews each

investment on a deal by deal basis. Members: 7 members including 2 from partner funds, 1 from applicant partner fund, 2 from Vancity, 2 from investor group; Vancity chairs committee

Investment Approval: 4 out of 7 in agreement; both investor

representatives in agreement

PARTNERSHIP OPERATING TERMS CONTINUED Transaction Size: Minimum transaction size of

$50,000 with maximum of $2,000,000

Returns: Partner will provide CIF pool a return equivalent to GOC

5-year bond rate. Partner is responsible for

achieving blended rate of return (I.e. partner may price loans at whatever rates the market will bear with an obligation to generate GOC 5-year bond rate to the CIF pool.)

LOAN DIVERSIFICATION

Asset Target Commercial and non-profit loans: 25 – 50% Community real estate (including affordable housing): 50 – 75%

GEOGRAPHIC DIVERSIFICATION

Asset distribution will be population-driven. If no take-up, assets will be re-allocated to active provinces, with flexibility for financings that cross provincial boundaries.

DEAL FLOW

Targeted deal flow: $4 – 5 M per year in business financings

RISK CONTROLS

Government guarantee of principal Loans will be secured by an appropriate

combination of mortgages, chattel mortgages, general security agreements, personal property security agreements, promissory notes and personal guarantees

Double diligence for larger transactions Diversified investment pool

PRINCIPAL TERMS

Fund size $20 millionCommitment Minimum $1 millionTerm 5 year minimum (for Investors)Management fee1.25%